Asset-heavy property groups like HPL should have minimal key man risk

THE tycoon Ong Beng Seng has been in the corporate limelight here for years. His name, or OBS as he is popularly known, is linked with top hotels, high-profile takeover battles, as well as the bringing of the Formula 1 night race to Singapore.

Thus, it sent shockwaves throughout corporate Singapore when Hotel Properties Limited (HPL) announced early in the morning on Jul 14 that OBS was asked by the Corrupt Practices Investigation Bureau (CPIB) to provide information on his interactions with Minister for Transport S Iswaran, and that OBS was arrested and had posted bail.

Aged 77, OBS is a Singapore-based Malaysian billionaire. He is the co-founder of HPL, where he is the managing director. Based on latest corporate filings, OBS has a total interest of over 60 per cent in HPL.

HPL’s nominating committee has assessed and determined that OBS continues to be suitable to carry out his duties and responsibilities as managing director.

Nonetheless, HPL’s share price closed 2.6 per cent lower on Jul 14. HPL’s share price fell by as much as 7 per cent at the opening bell that day.

OBS is synonymous with HPL. I became a shareholder of HPL years back, partly because of OBS’ mystique. I have not personally interacted with him, although I caught a glimpse of him once at an event. 

Could OBS’ standing and actions now leave the company at risk if he is taken out of the HPL picture?

In the operations of an asset-heavy property-related group, the key man risk may be minimal. Let’s use HPL as a case study.

Orchard crown jewel

First, much of HPL’s value comes from the assets it owns. The group’s crown jewel is its ownership of the roughly 150,000 square feet (sq ft) of freehold land, on a prime corner of Orchard Road and Cuscaden Road, that houses Forum The Shopping Mall, the voco Orchard Singapore hotel, and HPL House. HPL also owns the Four Seasons Hotel Singapore, which is located behind the voco Orchard.

Demand for space at prime locations in the Orchard Road belt is driven by Singapore’s attractiveness to wealthy residents and the strength of international visitor arrivals.

Meanwhile, capital values of big freehold Orchard Road assets are supported by private wealth seeking quality assets in safe-haven Singapore. 

Recently, a development proposal was submitted to the Urban Redevelopment Authority involving land parcels that house Forum, voco Orchard, and HPL House.

It’s possible that HPL will integrate hotel and retail components into a mega luxury commercial project that yields over 700,000 sq ft of gross floor area.  

Arguably, the Orchard Road assets can be successfully redeveloped, regardless of the level of OBS’ involvement. 

Good architects and consultants can come up with a compelling design. Management together with consultants can work to get the right product positioning. A third-party development manager can help manage the project’s development if needed. 

Given the location of the properties, there should be credible parties who are keen to form joint ventures in the redevelopment project, if HPL wants to work with partners. Based on the quality of the assets and redevelopment plans, debt financing can be secured.   

Second, HPL is active in the hospitality sector. As at end-2022, the group has interests in 38 hotels under brands such as Four Seasons Hotels & Resorts, Como Hotels & Resorts, InterContinental Hotels Group, Six Senses Hotels & Resorts and Marriott International.

The group also manages its own hotels under brands such as Hard Rock Hotels and Concorde Hotels & Resorts.

Potential to outperform

HPL’s hotel presence spans 15 countries – Singapore, Malaysia, Thailand, Indonesia, Maldives, Seychelles, Vanuatu, the US, Bhutan, Tanzania, South Africa, Vietnam, the UK, Italy and Sri Lanka.

Expect operations at the hotels to carry on per normal and for the various brands to continue to draw customers based on their strengths and network.

Demand for hotels enjoys support from growing global prosperity, as well as the appetite for adventure and new experiences among travellers.

Moreover, HPL owns many luxury hotels. And luxury hotels likely have better pricing power to mitigate rising costs versus non-luxury hotels.

Third, other property assets that HPL owns include completed high-quality income-generating properties. HPL, together with partners, completed the acquisition of Singapore Press Holdings in 2022. Among others, this purchase gives HPL ownership interests in Paragon Reit and student housing properties in the UK.

Demand for student housing is driven by the UK’s popularity as a destination for further education. Paragon Reit’s key assets such as Paragon in Orchard Road and The Clementi Mall are buoyed by the resilience of high-quality malls in Singapore. Paragon is a strong performing Orchard Road mall, which will gain from continued growth in visitor arrivals to Singapore.

In the UK, HPL has completed constructing two central London office buildings, namely Bankside Yards West - Arbor and Paddington Square. Rental income has started to accrue or will start to accrue for these properties over 2023.

While London’s commercial property sector is under stress, high-quality assets that excel in placemaking can thrive. Bankside Yards and Paddington Square have the scale, design, connectivity and mix of components to potentially outperform.

Notwithstanding OBS’ recent travails, given his age, the day may come soon when he is no longer running HPL. 

Sans OBS at the helm, HPL may find it trickier to secure great sites for resorts in exotic locations. Maybe other executives will lack his cachet in drawing top names to stay at HPL’s properties. 

If OBS is less involved in leading HPL, maybe he will be open to selling out of HPL. Sure, HPL trades above its end-2022 book value.

But, the said book value could be severely understated as hotel assets, some of which are long held, are stated at historical cost less depreciation and any impairment. Restating the net asset value of HPL might yield upside in the region of 80 per cent.

Indeed, selling HPL to a third party could reap optimal returns for shareholders.

Much disruption is taking place in the real estate space. Still, players who own quality buildings in choice locations should prosper.

Count on high-quality property portfolios, if available for sale, to draw strong investor interest.